Chapter 3.Pdf

Financial Institutions - Chapter 3
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1. Which of the following led to
the sharp decline in bank profits
in 2008?
a. Record high loan loss provisions
b. Record gains in trading
activities
c. Significant goodwill impairment
expenses
d. All of the above.
e. a. & c. only.

e. a. & c. only.

2. Which of the following is not a
characteristic of a typical
commercial bank?
a. Most banks own few fixed
assets.
b. Most banks have a high degree
of operating leverage.
c. Most banks have few fixed
costs.
d. Many bank liabilities are
payable on demand.
e. Banks generally operate with
less equity capital than nonfinancial firms.

b. Most banks have a
high degree of

operating leverage.

3.

3. Bank assets fall into each of the
following categories except:
a. loans.
b. investment securities.
c. demand deposits.
d. noninterest cash and due from
banks.
e. other assets.

c. demand deposits.

4.

4. Typically, "call loans" are:
a. residential mortgages.
b. farm loans.
c. demand deposits.
d. payable on demand.
e. automobile loans.

d. payable on demand.

5. A loan to an individual to
purchase a home would be
considered a:
a. consumer loan.

b. commercial loan.
c. agricultural loan.
d. construction loan.
e. real estate loan.

e. real estate loan.

1.

2.

5.

6.

6. Which of the following would not be
considered a commercial loan?
a. An interim construction loan
b. A working capital loan
c. A loans to another financial institution
d. A loan to purchase a piece of industrial
equipment
e. A loan to expand a factory

a. An interim
construction
loan

7.

7. Banks generate their largest portion of
income from:
a. loans.
b. short-term investment.
c. demand deposits.
d. long-term investments.
e. certificates of deposit.

a. loans.

8.

8. Loans typically fall into each of the
following categories except:
a. real estate.
b. individual.
c. commercial.
d. agricultural.
e. municipal.

e. municipal.

9.

9. Which of the following adjustments are
made to gross loans and leases to obtain
net loans and leases?
a. The loan and lease loss allowance is
subtracted from gross loans
b. Unearned income is subtracted from

gross interest received
c. Investment income is added to gross
interest received
d. a. and b.
e. a. and c.

d. a. and b.

10.

10. An example of a contra-asset account
is:
a. the loan and lease loss allowance.
b. unearned income.
c. buildings and equipment.
d. revenue bonds.
e. the provision for loan loss.

a. the loan
and lease
loss
allowance.

11.

11. Which of the following bank assets is the
most liquid?
a. Long-term investments
b. Short-term investments
c. Loans

d. Demand deposits
e. Unearned income

b. Short-term
investments


12.

12. Which of the following would a bank
generally classify as a short-term
investment?
a. Demand deposits
b. Deposits at the Federal Reserve
c. Repurchase agreements
d. Fed Funds purchased
e. Vault cash

c. Repurchase
agreements

17.

17. Securities that require unrealized
gains or losses to be recorded on the
income statement are called:
a. held-to-maturity securities.
b. trading account securities.
c. available-for-sale securities.
d. revenue securities.

e. repurchase agreements

b. trading
account
securities.

13.

13. All other things constant, securities
that are extremely liquid:
a. earn higher rates of return than
securities that are less liquid.
b. have a longer maturity than less liquid
securities.
c. have lower risk than less liquid
securities.
d. a. and b.
e. b. and c.

c. have lower
risk than less
liquid securities.

18.

18. A negotiable instrument often used in
trading goods that guarantees payment
to the owner the instrument is known as
(a):
a. bankers acceptance.

b. payment guarantee.
c. commercial paper.
d. bankers payment.
e. repurchase agreement.

a. bankers
acceptance

19.

14.

14. Which of the following would a bank
generally classify as a long-term
investment?
a. Treasury bill
b. Vault cash
c. Cash items in process of collection
d. Municipal bond
e. Repurchase agreements

d. Municipal
bond

19. The largest component of "noninterest cash and due from banks" is:
a. cash items in process of collection.
b. deposits held at other financial
institutions.
c. federal funds sold.
d. vault cash.

e. loans from the Federal Reserve.

a. cash items in
process of
collection.

20.

15. Securities that are "held-to-maturity"
are:
a. trading account securities.
b. recorded on the balance sheet at
amortized cost.
c. marked-to-market.
d. a. and b.
e. a. and c.

b. recorded on
the balance
sheet at
amortized cost.

20. The volume of net deferred credit is
commonly referred to as:
a. the burden.
b. NOW balances.
c. reserve requirements.
d. equity.
e. float.

e. float.

15.

21.

b. Businesses

16. Securities that require unrealized
gains or losses to be recorded as a
change in stockholder's equity are
called:
a. held-to-maturity securities.
b. trading account securities.
c. available-for-sale securities.
d. revenue securities.
e. repurchase agreements

c. available-forsale securities.

21. _________ own(s) the bulk of demand
deposit accounts.
a. Consumers
b. Businesses
c. State governments
d. The federal government
e. Non-profits

22.

22. Which of the following is are only
available to non-commercial customers?
a. Money Market Demand Accounts
b. Demand deposit accounts
c. Mortgage loans
d. Negotiable Orders of Withdrawal
(NOW) accounts
e. Auto leases

d. Negotiable
Orders of
Withdrawal
(NOW)
accounts

16.


23.

23. Checking accounts with
unlimited check-writing and pay
interest are known as:
a. demand deposit accounts.
b. money market deposit
accounts.
c. NOW accounts.
d. certificates of deposit.
e. time deposits.

c. NOW accounts.

28.

28. Core deposits consist of
all of the following except:
a. demand deposits.
b. NOW accounts.
c. jumbo certificates of
deposit.
d. savings accounts.
e. money market demand
accounts.

c. jumbo certificates of
deposit.

24.

24. Jumbo CDs that a bank
obtains from a third-party
broker are called:
a. money market demand
accounts.
b. time deposit accounts.
c. mortgage loans.
d. brokered deposits.
e. core deposits.

d. brokered deposits.

29.

29. Which of the following is
not considered a volatile
liability?
a. Jumbo CDs
b. Deposits in foreign offices
c. Repurchase agreements
d. Federal funds sold
e. All of the above are
considered volatile liabilities

d. Federal funds sold

25.

25. Jumbo certificates of deposit
(CDs) typically:
a. have maturities greater than 10
years..
b. are negotiable.
c. are $1 million in size.
d. All of the above
e. b. and c.

e. b. and c.

30.

30. Which of the following
would be the least sensitive to
changes in interest rates?
a. Demand deposits
b. Repurchase agreements
c. Federal funds purchased
d. Eurodollar liabilities
e. Jumbo CDs

a. Demand deposits

26.

26. Unsecured liabilities created
from the exchange of
immediately available funds are
known as:
a. federal funds purchased.
b. repurchase agreements.
c. federal funds sold.
d. pledged securities.
e. brokered deposits.

a. federal funds
purchased.

31.

b. represents management's
estimate of potential lost

revenue from bad loans.

27.

27. A bank's core deposits are:
a. vault cash.
b. stable deposits that are not
typically withdrawn over short
periods of time.
c. the bank's deposits at the
Federal Reserve.
d. the most interest rate
sensitive liabilities of a bank.
e. deposits held in foreign
offices.

b. stable deposits that
are not typically
withdrawn over short
periods of time.

31. The "provision for loan and
lease losses":
a. are the realized losses from
the previous accounting
period.
b. represents management's
estimate of potential lost
revenue from bad loans.
c. determined by the Federal

Reserve for all banks.
d. does not affect net income.
e. is another name for a bank's
"burden."


32. A bank's "burden" is defined as:
a. net interest income minus noninterest income.
b. non-interest income minus noninterest expense.
c. non-interest expense minus noninterest income.
d. net interest income plus noninterest income.
e. interest expense plus non-interest
expense.

c. non-interest
expense minus
non-interest
income.

33.

33. Everything else the same, a bank's
"burden" would most likely increase
given:
a. a decrease in overhead expenses.
b. an increase in interest rates.
c. a decrease in interest rates.
d. an increase in executive salaries.
e. an increase in service charges
collected by the bank.

e. an increase in
service charges
collected by the
bank.

34.

34. Interest income includes:
a. interest earned on all of the bank's
assets.
b. fees earned on all of the bank's
assets.
c. fees earned on all of the bank's
deposit accounts.
d. all of the above.
e. a. and b. only

e. a. and b. only

35.

35. A bank currently owns a municipal
bond paying a tax-exempt rate of 5%.
If the banks marginal tax rate is 35%,
what is the taxable equivalent yield?
a. 7.69%
b. 3.25%
c. 6.75%
d. 3.70%

e. 9.32%

36.

36. A bank currently owns a municipal
bond paying a tax-exempt rate of
6.5%. If the banks marginal tax rate is
40%, what is the taxable equivalent
yield?
a. 3.90%
b. 10.83%
c. 9.10%
d. 4.64%
e. 9.32%

32.

37.

37. A bank currently owns a municipal
bond paying a tax-exempt rate of 8%.
If the banks marginal tax rate is 39%,
what is the taxable equivalent yield?
a. 11.12%
b. 4.88%
c. 13.11%
d. 5.76%
e. 9.32%

c. 13.11%

Municipal Interest
Income (Tax
Equivalent) =
Municipal Interest
Income/(1-Tax
Rate)
.08/(1-.39) = .1311

38.

38. Net interest income is the
difference between:
a. gross interest income and net
interest expense.
b. gross interest income and noninterest income.
c. the burden and realized gains or
losses.
d. non-interest income and net
interest expense.
e. gross interest income and gross
interest expense.

e. gross interest
income and gross
interest expense.

39.

39. Non-interest income includes all
of the following except:

a. checking account fees.
b. insufficient funds service charges.
c. trust income.
d. personnel expenses.
e. all of the above are considered
non-interest income.

d. personnel
expenses.

a. 7.69%
Municipal Interest
Income (Tax
Equivalent) =
Municipal Interest
Income/(1-Tax
Rate)
.05/(1-.35) = .0769

40.

40. Non-interest income includes all
of the following except:
a. monthly fee income on checking
accounts.
b. late fees on loans.
c. trust income.
d. insufficient funds service charges.
e. all of the above are considered
non-interest income.

b. late fees on
loans.

b. 10.83%
Municipal Interest
Income (Tax
Equivalent) =
Municipal Interest
Income/(1-Tax
Rate)
.065/(1-.40) = .1083

41.

41. Non-interest expenses includes all
of the following except:
a. occupancy expenses.
b. goodwill impairment.
c. insufficient funds service charges.
d. personnel expenses.
e. all of the above are considered
non-interest expense.

c. insufficient funds
service charges.


42.

43.

44.

42. Which of the following
would be considered an
extraordinary item on an
income statement of a bank?
a. Revenue from the sale of the
bank's office building.
b. Interest income when the
spread is greater than 10%.
c. Realized security gains.
d. Collection on loans already
charged off.
e. All of the above would be
considered extraordinary items.

a. Revenue from the sale
of the bank's office
building.

43. Total operating income is
comparable to _________ for a
non-financial firm.
a. sales
b. cost of goods sold
c. gross profit
d. earnings before interest and
taxes

e. net income

a. sales

44. Net income is defined as:
a. Net interest income - burden
+ provision for loan loss +
securities gains or losses taxes.
b. Net interest income + burden
+ provision for loan loss +
securities gains or losses taxes.
c. Net interest income - burden
- provision for loan loss +
securities gains or losses taxes.
d. Net interest income - burden
- provision for loan loss +
securities gains or losses +
taxes.
e. Net interest income + burden
- provision for loan loss +
securities gains or losses taxes.

c. Net interest income burden - provision for
loan loss + securities
gains or losses - taxes.

45.

45. Total operating expense is
comparable to _________ for a nonfinancial firm.

a. sales
b. cost of goods sold + other
operating expenses
c. interest expense
d. earnings before taxes
e. net income

b. cost of goods sold +
other operating
expenses

46.

46. A change in net interest
income would occur when:
a. the composition of the assets of
the bank change.
b. the average asset yield
changes.
c. the volume of the assets of the
bank change.
d. the average interest expense
changes.
e. All of the above

e. All of the above

47.

48. Relative to retail banks,

wholesale banks:
a. deal primarily with consumers.
b. operate with fewer commercial
deposits.
c. purchase more non-core
liabilities.
d. hold proportionally more
consumer loans.
e. All of the above.

c. purchase more noncore liabilities.

48.

49. Relative to wholesale banks,
retail banks:
a. focus on individual consumer
banking relationships.
b. operate with fewer consumer
deposits.
c. purchase more non-core
liabilities.
d. hold proportionally more
business loans to large firms.
e. All of the above.

a. focus on individual
consumer banking
relationships.

49.

50.

51.

52.

51. Return on equity can be decomposed
into:
a. the sum of return on assets and the
equity multiplier.
b. the product of return on assets and
the equity multiplier.
c. the product of the profit margin and
the equity multiplier.
d. the sum of the profit margin and the
equity multiplier.
e. the sum of the profit margin, equity
multiplier, and the interest ratio.

b. the product
of return on
assets and the
equity
multiplier

52. Return on assets can be calculated
as:

a. return on equity plus the equity
multiplier.
b. net interest income divided by earning
assets.
c. asset utilization minus the expense
ratio and the tax ratio.
d. interest income minus interest
expense.
e. earning assets divided by average
total assets.

c. asset
utilization minus
the expense
ratio and the
tax ratio.

53. What is the return on equity for a
bank that has an equity multiplier of 14,
an interest expense ratio of 4%, and a
return on assets of .9%?
a. 1.3%
b. 4.0%
c. 9.0%
d. 12.6%
e. 8.6%

d. 12.6%
ROE = ROA EM
= 0.9% 14 =

12.6%

54. What is the return on equity for a
bank that has an equity multiplier of 9, an
interest expense ratio of 6%, and a return
on assets of 1.2%?
a. 10.8%
b. 6.0%
c. 8.0%
d. 4.8%
e. 0.65%

a. 10.8%
ROE = ROA EM
= 1.2% 9 = 10.8%

53.

55. What is the return on equity for a bank
that has an equity multiplier of 12, an
interest expense ratio of 5%, and a return
on assets of 1.1%?
a. 5.0%
b. 13.2%
c. 8.2%
d. 26.4%
e. 0.66%

b. 13.2%
ROE = ROA

EM = 1.1% 12 =
13.2%

54.

56. Everything else the same, financial
leverage works to a bank's advantage
when:
a. the return on assets is positive.
b. the return on assets is negative.
c. fixed assets are high.
d. fixed assets are low.
e. a. and d.

a. the return
on assets is
positive.

55.

57. What is the equity multiplier for a bank
where equity is equal to 8% of total
assets?
a. 1.08
b. 8.00
c. 0.92
d. 12.5
e. 1.25

d. 12.5

Total
Assets/Total
Equity =
100%/8% =
12.5x

56.

58. What is the equity multiplier for a bank
where equity is equal to 10% of total
assets?
a. 90.00
b. 10.00
c. 1.10
d. 110.00
e. 1.00

b. 10.00
Total
Assets/Total
Equity =
100%/10% =
10.0x

57.

59. What is the equity multiplier for a bank
where equity is equal to 12% of total
assets?
a. 83.33

b. 1.12
c. 0.88
d. 12.00
e. 8.33

e. 8.33
Total
Assets/Total
Equity =
100%/12% =
8.33x

58.

60. Net income is calculated as:
a. total revenue - total operating
expenses.
b. total revenue - total operating expenses
- taxes.
c. asset utilization - expense ratio.
d. asset utilization - expense ratio - tax
ratio.
e. interest expense ratio - non-interest
expense ratio - provision for loan loss ratio

b. total
revenue total
operating
expenses taxes.

59.

60.

61.

62.

63.

61. The expense ratio is
calculated as:
a. total revenue - total
operating expenses.
b. total revenue - total
operating expenses - taxes.
c. interest expense ratio non-interest expense ratio provision for loan loss ratio.
d. asset utilization - expense
ratio - tax ratio.
e. interest expense ratio +
non-interest expense ratio +
provision for loan loss ratio.

e. interest expense ratio +
non-interest expense ratio +
provision for loan loss ratio.

62. Interest expense varies
between banks because of:

a. rate effects.
b. composition effects.
c. volume effects.
d. all of the above.
e. a. and c.

d. all of the above.

73. The efficiency ratio
measures:
a. a bank's ability to control
interest expense.
b. a bank's ability to control
non-interest expense.
c. a bank's spread.
d. a bank's burden.
e. a bank's operating
leverage.

b. a bank's ability to control
non-interest expense.

74. Which of the following
would not be considered an
earning asset?
a. Cash due from banks
b. Municipal securities
c. Treasury bills
d. Repurchase agreements
e. Mortgages

a. Cash due from banks

75. The goal of a bank
manager should be:
a. to maximize earnings.
b. to minimize taxes.
c. to minimize risk.
d. to maximize shareholder
wealth.
e. to maximize net interest
income.

d. to maximize shareholder
wealth.

64.

76. Which of the following is not one
of the risks identified by the Federal
Reserve Board?
a. Credit risk
b. Market risk
c. Ownership risk
d. Reputation risk
e. Legal risk

c. Ownership risk

65.

77. Which type of risk is the most
difficult to quantify?
a. Credit risk
b. Liquidity risk
c. Legal risk
d. Operating risk
e. Market risk

c. Legal risk

66.

78. A savings and loan that sold off
their junk bond holdings and issued
consumer auto loans with the
proceed would most likely be:
a. decreasing their market risk.
b. increasing their capital risk.
c. decreasing their legal risk.
d. increasing their operating risk.
e. reducing their credit risk.

e. reducing their
credit risk.

67.

79. Recoveries refer to:
a. the dollar value of loans actually

written off as uncollectible.
b. the dollar amount of loans that
were previously charged-off but
now collected.
c. net charge-offs.
d. loans not currently accruing
interest.
e. loans that regulators have
required the bank to "recover".

b. the dollar amount
of loans that were
previously chargedoff but now
collected.

68.

80. Classified loans:
a. still accrue interest.
b. have not had a principle or
interest payment made in 90 days.
c. exactly offset gross charge-offs.
d. are loans in which regulators have
forced management to set aside
reserves.
e. all of the above

d. are loans in which
regulators have
forced management

to set aside reserves


81. The risk that a bank cannot meet
payment obligations in a timely and
cost-effective manner is known as:
a. credit risk.
b. capital risk.
c. market risk.
d. operating risk.
e. liquidity risk.

e. liquidity risk.

82. All of the following are examples of
operational risk except:
a. fraud.
b. compromised security data.
c. theft.
d. business interruptions.
e. default on a loan.

e. default on a
loan.

83. Which of the following is not part of
the CAMELS ratings?
a. Capital adequacy.
b. Asset quality.
c. Earnings quality.

d. Liabilities quality.
e. Sensitivity to market risk.

d. Liabilities
quality.

84. In the CAMELS ratings, which
reflects the bank's off-balance sheet
activities?
a. Capital adequacy
b. Asset quality
c. Earnings quality
d. Liquidity
e. Sensitivity to market risk

b. Asset quality

73.

85. Which of the following is not a
techniques that banks use to "manage
earnings"?
a. Window dressing
b. Nonrecurring sales of assets
c. Adjusting the allowance for loan
losses
d. Increasing loans classified as nonperforming
e. All of the above are techniques that
banks use to "manage earnings"

d. Increasing
loans classified
as nonperforming

74.

86. Subordinated bank debt is federally
insured.

False

75.

87. Total revenue is the same as total
operating income

True

76.

88. Retail banks deal primarily with
commercial customers.

False

77.

89. When constructing ratios, average
balance sheet data should be used.

True

69.

70.

71.

72.

78.

90. Balance sheet items are calculated for a
particular point in time.

True

79.

91. Regarding interest expense, volume effects
suggest that the mix of liabilities among banks
may differ.

False

80.

92. Banks that use preferred stock understate
their ROE relative to banks that do not use
preferred stock.

False

81.

93. Eliminating borrowing from the Federal
Reserve at the end of fiscal year is an example
or "window dressing."

True

82.

94. Duration is an elasticity measure that
indicates the relative price sensitivity of
different securities.

True

83.

95. Larger banks hold a larger percentage of
earning assets than smaller banks.

False

84.

bank's equity multiplier measures the bank's:
a. financial leverage.

b. operating leverage.
c. credit leverage.
d. interest rate exposure.
e. duration gap.

a.
financial
leverage.

85.

bank that deals primarily with commercial
customers is called:
a. an Edge Act bank.
b. a retail bank.
c. a wholesale bank.
d. a uniform bank.
e. a liability bank.

c. a
wholesale
bank.